Ralph Roberts Realty, LLC v. Savoy (In re Ralph Roberts Realty, LLC)

Citation: 562 B.R. 144Docket: Case No. 12-53023; Adv. Pro. No. 12-6131

Court: United States Bankruptcy Court, E.D. Michigan; October 14, 2016; Us Bankruptcy; United States Bankruptcy Court

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This adversary proceeding involves Defendants Jon Savoy, Arnold Hassig (a.k.a. Butch Hassig), Adam Hassig, and four related entities, who participated in an investor program managed by Plaintiff/Debtor Ralph Roberts, Realty, LLC, prior to Realty's bankruptcy filing. The participation was based on an oral agreement, and some Defendants acquired sixteen properties through this program. Realty seeks a judgment declaring that 30% of profits from unsold properties are part of the bankruptcy estate (Count I), an accounting of funds from the pre-bankruptcy sale of three properties (Count II), and the turnover of at least $100,500 allegedly owed for profit sharing on resold properties (Count III). After a bench trial, which included opening arguments, evidence presentation, and closing arguments, the Court reviewed all arguments, exhibits, and witness testimonies. The Court's opinion reflects its findings of fact and conclusions of law, concluding to enter a judgment in favor of Realty against some Defendants, though not granting the full relief requested.

Subject matter jurisdiction over the adversary proceeding is established under 28 U.S.C. §§ 1334(b) and 157(a), as well as Local Rule 83.50(a) of the Eastern District of Michigan, with all parties concurring that it is a core proceeding. The Court has not yet classified the proceeding as core or non-core, but this classification is now irrelevant due to the parties consenting to the Bankruptcy Court's authority to issue a final judgment or order under 28 U.S.C. § 157(c)(2) for any non-core claims.

Recent Supreme Court rulings have clarified the authority of bankruptcy courts in entering final orders. Specifically, *Stern v. Marshall* determined that bankruptcy courts lack constitutional authority to finalize certain core claims without consent. *Exec. Benefits Ins. Agency v. Arkison* established that these claims could be treated as non-core, requiring proposed findings for district court review unless all parties consent. *Wellness Int’l Network, Ltd. v. Sharif* affirmed that consent could be implied from parties' actions.

Consequently, claims can be classified into three categories: core claims with full authority for final judgments; Stern-core claims needing consent for final judgment; and non-core claims, also requiring consent for final judgment. In light of *Arkison*, Stern-core claims are treated like non-core claims. Given the parties' consent in this case, the Bankruptcy Court possesses the authority to issue a final judgment regardless of the claims' categorization, making further classification unnecessary.

Ralph Roberts, a real estate broker and owner of Realty, entered into an oral agreement with certain Defendants in the summer of 2009 to participate in Realty's Investor Program. The Defendants, primarily the first investors in this program, purchased sixteen properties through it. The undisputed terms of the Investor Program included Realty's responsibility to identify distressed properties in Wayne, Macomb, and Oakland counties for purchase at sheriff's sales. Realty would email a list of potential properties three times a week, and interested investors were required to confirm their bids by a specified deadline, providing funds either via wire transfer or cashier's check.

Roberts would attend the sheriff's sales to bid on behalf of the investors. If successful, the property would be acquired either personally by the investor or through an entity they established. Successful bidders were obligated to pay a $5,000 Acquisition Fee in two installments, with conditions for credits if properties were redeemed. Investors were also required to pay Realty 30% of their profits from property sales, with specific credits and interest provisions applying to Defendants Butch Hassig and Jon Savoy. Additionally, if Realty facilitated the sale, it would earn a brokerage commission, and a payment of $500 would be made to Kelly Savoy for her role in handling closings.

Certain terms of the Investor Program are disputed between Realty and the Defendants, particularly regarding the calculation of profit splits and permissible expense deductions. Realty asserts that profit split calculations differ based on the property transaction type: for properties flipped, all allowable expenses (repairs, commissions, etc.) can be deducted, while for properties rented before resale or sold under a land contract, only specific expenses (Acquisition Fee, commissions, normal closing costs, and transfer tax) are deductible. Realty contends that various expenses, including accounting and professional fees, should not be deducted in any case.

Conversely, Defendants maintain there is a single method for calculating the profit split that allows for the deduction of all expenses incurred during ownership, including those Realty claims should not be included. Defendants argue that they were never informed of any differing calculation methods prior to the trial.

Additionally, there is a disagreement over whether Defendants had a right of first refusal for selecting properties, with Realty claiming they did not, while Defendants assert they did. The parties also disagree on sharing losses, with Defendants believing they should receive a full credit for losses incurred, which Realty denies, stating their agreement did not include loss-sharing provisions.

Lastly, there is contention over the timing of profit split payments in land contract situations. Realty argues that payment is due in cash or via assignment when only the profit split remains, while Defendants claim payment should occur from the final balloon payment of the land contract.

Defendants acquired sixteen properties through the Investor Program, including addresses in Chesterfield, Eastpointe, Warren, Clinton Township, New Baltimore, Sterling Heights, Fraser, Centerline, and St. Clair Shores. Among these, three properties—Breckenridge, Palm Beach, and Ursuline—were redeemed by their homeowners. Additionally, the Eastland property was resold to its homeowner following a lawsuit settlement; Realty claims no loss on this property, while Defendants assert a $12,879.30 loss.

Four properties—Antonia, Foxcrest, Lowell, and Raymond—were flipped, with Defendants maintaining they paid the appropriate amounts under the Investor Program, and Realty is not seeking additional funds for these. Two properties, Jimmy and Duncan, were being resold under land contracts at the time of trial, leading to disputes over expense deductions in profit calculations. Realty contends that after disallowing certain expenses, Defendants owe $18,000 from Duncan’s profits, while Defendants argue no payments are due based on their allowable deductions and set-off claims for losses on other properties.

Defendants also resold Engleman, Firwood, Ledgestone, and Trailwood, claiming no debt to Realty from these sales. They reported a loss of nearly $40,000 on Engleman after spending over $18,000 on repairs, asserting this loss offsets any profits from other properties. Realty disputes the legitimacy of $35,000 in deductions claimed by Defendants, suggesting that if those expenses are excluded, Engleman's profit would be approximately $9,000.

Firwood Defendants claim to have purchased the Firwood property for $28,288 and sold it for $84,900, asserting that due to errors by the Plaintiff and property contamination, they did not make a profit and thus owe no profit split to Realty. Realty counters that the property was flipped, questioning the legitimacy of the expenses deducted by the Defendants, and estimates a profit of $12,000 after excluding non-allowable expenses. 

For the Ledgestone property, purchased for $23,500 and sold for $69,900, Defendants also claim no profit due to expenses. Realty disputes the deductibility of many of these expenses, particularly since Ledgestone was rented before resale, and posits a profit of $23,000 after removing non-allowable expenses. 

Regarding Trailwood, which was rented prior to resale, Defendants allege a profit of $19,000; however, Realty claims that after adjusting for non-allowable expenses, the profit is approximately $81,000. 

The properties Irene and Teppert had not yet been sold at trial. They were rented out to former owners who lost them at a sheriff's sale. Realty estimates potential profits of $22,000 for Teppert and $81,000 for Irene upon their sale. Defendants argue that due to losses on other properties, they will not owe Realty any profit from Teppert and Irene unless Realty first compensates them around $65,000 for those losses.

In bankruptcy proceedings, Realty and Roberts filed for Chapter 11 relief in May 2012, with a joint administration order issued shortly after. A Fifth Amended Plan was filed in December 2012, and confirmed in February 2013, with no objections or claims filed by the Defendants.

The court determined that Defendants Jon Savoy and Arnold 'Butch' Hassig acted jointly regarding the Investor Program and property transactions. Consequently, they, along with the associated LLCs, are found jointly and severally liable to Realty for any sums owed related to the discussed properties.

Conflicting evidence exists regarding the expenses that can be deducted when calculating the profit split under the parties' oral agreement. The testimony of Ralph Roberts, Realty's sole witness on this matter, is inconsistent across three separate occasions. 

Version 1, presented during the current trial, distinguishes between "flipped" properties, which are resold without prior rental, and those that are rented before resale. This version allows limited deductible expenses for rented properties, excluding many of the expenses claimed by the Defendants.

Version 2, from a previous trial in the Roger Roberts case, outlines a broader scope of deductible expenses. In this version, Roberts stated that for properties that are flipped, all expenses are deductible, while for rented properties, certain expenses like taxes and insurance are excluded, but other necessary expenses to prepare the property for sale are included. Additionally, personal time of the investor is not considered a deductible expense. 

Overall, Version 2 is more favorable to the Defendants than Version 1 regarding expense deductions for the profit calculation.

Ralph Roberts provided a third version of the Investor Program in an affidavit signed on October 7, 2013, which was submitted by Realty in support of its motion for summary judgment. In this affidavit, Roberts stated that investors could deduct reasonable maintenance, refurbishment costs, taxes, and utilities from their net profit split. Additionally, if an investor rented a property, rental income would offset the expenses incurred on that property. He emphasized that rental income would significantly exceed the expenses due to a strong rental market.

During trial, Roberts reaffirmed this rental income provision, which differs from earlier versions of the Investor Program. Specifically, Version 3 allows investors to deduct the same expenses for properties resold after rental as for properties sold without prior rental. Furthermore, it integrates rental income into the profit calculation, netting expenses against this income. This contrasts sharply with Realty’s Version 1 and Version 2, and also differs from the Defendants’ interpretation of the agreement.

The Court found both Roberts and Jon Savoy credible witnesses despite their conflicting testimonies. However, it concluded that Realty did not meet its burden of proof regarding Version 1's accuracy in reflecting the oral agreement between Realty and the Defendants. The Court noted that Roberts' trial testimony was inconsistent with his previous statements and the three versions he provided were contradictory. Ultimately, the evidence presented was deemed confused and unpersuasive, leading the Court to adopt the Defendants' profit calculations for assessing the properties, with specific exceptions outlined elsewhere.

The Court's analysis addresses the financial obligations of Defendants regarding sixteen properties purchased under an oral agreement with Realty, noting that Realty seeks no relief for eight of these properties. For the remaining eight, Realty is pursuing either monetary or declaratory relief. Six of these properties have been sold, while two remain unsold as of trial. 

Focusing on the Ledgestone property, purchased by Ryan Residential Properties Group, LLC, the Court made several critical adjustments to the Defendants' financial calculations. The seller’s fee was corrected to $5,000 instead of the claimed $10,000, as agreed upon by the parties. The Court excluded various expenses, including meals, office supplies, service charges, bad debt, and a claimed interest expense of $1,178.11 related to borrowing for the purchase; only a specific interest amount of $2,248.92 was deemed allowable. The Court did allow a $5,000 acquisition fee to Realty. 

After these adjustments, the net profit determined for the split was $1,927.71, leading to Realty's 30% share of $578.31. Additionally, $2,500 of the acquisition fee remains unpaid to Realty, resulting in a total amount owed of $3,078.31 from Defendants Ryan Residential Properties Group, LLC, Jon Savoy, and Arnold 'Butch' Hassig, who are jointly and severally liable for this sum.

Firwood was purchased by Jon Savoy at a sheriff’s foreclosure sale and transferred to his LLC, 1836 Brys, LLC, before being resold without prior rental. The Court adjusted the Defendants’ expense calculations similarly to the Ledgestone property, noting no claims for meals, entertainment, office supplies, service charges, or bad debt related to Firwood. Despite Realty's contention that the repairs and maintenance expense was excessive, the Court upheld the expense based on Savoy's testimony. Ultimately, after adjustments, Firwood resulted in a loss of $5,705.70, with $2,500.00 of the acquisition fee still owed to Realty. Defendants cannot offset their loss against this fee, making the total amount owed to Realty for Firwood $2,500.00, payable jointly and severally by 1836 Brys, LLC, Jon Savoy, and Arnold 'Butch' Hassig.

For the Trailwood property, purchased by Prime Residential Properties Group, LLC, it was rented before resale. Similar adjustments to expense calculations were made, with no claims for meals, service charges, bad debt, or a minor office supply expense. The adjusted net profit was $68,059.04, resulting in a 30% split due to Realty of $20,417.71. The entire unpaid acquisition fee of $5,000.00 is also owed, totaling $25,417.71 owed to Realty by Prime Residential Properties Group, LLC, Jon Savoy, and Arnold 'Butch' Hassig, jointly and severally.

The Engleman property followed a similar pattern, purchased by Jon Savoy, transferred to 1836 Brys, LLC, rented, and then resold. The Court disallowed several expenses, including those for meals, office supplies, service charges, and a website, totaling $70.93. Realty argued that repairs and maintenance expenses were excessively high, but the Court upheld the expense based on Savoy's testimony. After adjustments, the Engleman property resulted in a loss of $37,245.12.

A total of $2,500.00 in acquisition fees remains unpaid to Realty for the Engleman property, which is owed jointly and severally by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig. Defendants cannot offset this fee against any losses related to the property. 

Regarding the Duncan property, purchased at a Sheriff’s foreclosure sale, Jon Savoy acquired it, transferred it to 1836 Brys, LLC, and subsequently resold it on a 5-year land contract on July 9, 2010. The land contract purchaser continues to make payments. The Court adjusted Defendants’ expense claims, disallowing $62.97 in expenses for meals, entertainment, office supplies, and a $264.22 interest charge. Realty contested a claimed legal expense of $7,417.87, which the Court upheld as incorrect. Realty also argued that property tax and insurance expenses amounting to $300.38 and $402.82, respectively, should be disallowed; however, these are permitted for the nine-month period before the land contract began, as Realty did not prove they were incurred post-contract. After adjustments, the net profit for the split was calculated at $38,117.73, with 30% owed to Realty amounting to $11,435.32, also owed by the same Defendants. 

The Court determined that payment to Realty for the Duncan property is due when the land contract balance falls to $11,435.32 or less, and it may be made in cash or through an assignment of contract payments. The Court has not been shown that such payment is due as of trial. 

The Jimmy property was similarly acquired by Savoy at a foreclosure sale, transferred to 1836 Brys, LLC, and was rented before being resold.

The land contract for the property was executed on April 27, 2011, with the purchaser (vendee) still making payments at the time of trial. The Court adjusted the Defendants’ calculation worksheet by disallowing $72.97 in claimed expenses for meals, entertainment, office supplies, service charges, and website costs. Realty contested a $7,447.88 expense for "Legal" fees, which the Court also disallowed due to the absence of incurred legal fees for this property. Realty argued that property taxes and insurance expenses of $3,945.32 and $833.90 should be disallowed since the land contract required the purchaser to pay these; however, the Court permitted these expenses for the period from the acquisition at Sheriff’s sale (September 18, 2009) to the land contract date. After adjustments, the net profit for split calculation was $7,887.14, with Realty entitled to 30% ($2,363.14). Realty is additionally owed an unpaid acquisition fee of $2,500.00 and $1,000.00 for a "cash for keys" advance, totaling $5,863.14 owed by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally. The Court ruled that the $2,363.14 profit split is payable when the land contract balance is $2,363.14 or less, either in cash or by assigning the balance of payments. Realty also claims $906.80 for property taxes paid for the Raymond property, for which Adam Residential Properties Group, LLC and others are jointly and severally liable. A summary of amounts owed to Realty by the Defendants will follow based on these findings.

Defendants Jon Savoy, Arnold “Butch” Hassig, and various entities are found jointly and severally liable to Plaintiff Realty for specific amounts related to different properties: $25,417.71 for the Trailwood property; $3,078.31 for the Ledgestone property; and $22,298.46 for the Firwood, Engleman, Duncan, and Jimmy properties. Additionally, they are liable for $906.80 related to the Raymond property. The total liability of Savoy and Hassig amounts to $51,701.28, excluding any prejudgment interest, which Realty did not request during the trial process. Although post-judgment interest will accrue at the federal statutory rate, no debts are owed to Realty by Adam Hassig due to lack of evidence.

Regarding the unsold Irene and Teppart properties, Realty requests a declaratory judgment concerning findings on expenses incurred by the Defendants. However, the Court declines to grant this declaratory relief, stating that its findings and conclusions regarding the oral Investor Program agreement and related issues will be binding on all parties in any future litigation due to the doctrine of collateral estoppel.

Defendants claim a right to set off $65,194.17 in losses incurred from properties Engleman, Eastland, Fir-wood, and Ledgestone against profits owed to Plaintiff Realty under the Investor Program. Realty contends the Investor Program lacks a provision for such setoffs and argues that even if such a provision existed, Defendants are barred from asserting it for several reasons: (1) each property purchase is a separate transaction, preventing aggregation for setoff; (2) Defendants failed to timely file a proof of claim; (3) the confirmed Debtor’s Plan prohibits any setoff; (4) properties were purchased by different Defendants, thus losses of one cannot offset profits of another; and (5) pre-petition losses cannot offset postpetition profits. The Court concludes that Defendants cannot deduct losses from what they owe Realty for profit sharing or acquisition fees, nor do they have valid claims for property losses, as these rights were not part of the agreement between the parties. Testimony from Ralph Roberts supports this finding, indicating no agreement on loss-sharing was made, while Jon Savoy’s conflicting testimony was deemed less credible. Roberts consistently maintained that the agreement did not allow for loss-sharing in the Investor Program.

Ralph Roberts testified that under the Investor Program, Realty shares 50% of losses for investors, but clarified that this applied to later versions of the program and not to the Defendants in this case, who were among the first investors after the program's inception in June 2009. The agreement for the Defendants was more favorable, requiring them to pay only 30% of profits to Realty and allowing a $5,000 seller’s fee to be credited against profit calculations—a benefit not extended to later investors. The Court found Roberts’s testimony credible and determined that the oral agreement between Realty and the Defendants did not include any loss-sharing provisions. Consequently, if the Defendants incurred a loss, they were only exempt from profit sharing for that property and had no valid claims against Realty for losses, nor could they offset losses against other amounts owed. The Court rejected the Defendants’ defenses, including claims of a lack of "meeting of the minds," a right of first refusal, and an alleged contractual duty of Realty to find profitable properties. The Court found no evidence supporting these claims and concluded that the agreement did not guarantee profitability on properties. The Court will issue a judgment consistent with its findings.

Plaintiff seeks a judgment declaring that 30% of profits from the sale of properties under the Investor Program belongs to the bankruptcy estate, modifying an earlier claim of 33%. The original calculation of $100,500 was based on the 33% profit split, but all parties now agree that the correct percentage is 30%. Testimony from the trial indicates that the Investor Program began on June 1, 2009, with the Defendants participating from August 2009. Initially, the Defendants and Roberts expected to flip the properties purchased, but some were rented due to inability to flip them. Disagreements arise regarding allowable deductions for expenses when calculating profits. The document references multiple trial transcripts and reports that provide further details on the claims and testimonies related to the Investor Program.

Key testimonies were given by Ralph Roberts, Raymond Confer, and Jon Savoy during the trial, with Roberts' statements referencing his prior testimony in a separate case. Savoy acknowledged certain claims related to property payments, specifically regarding the profitability of properties resold on land contracts, suggesting that even if profitable, the Plaintiff would only receive 30% of the balloon payments after profits were calculated. The Plaintiff's claims included issues related to properties named Antonia and Foxcrest, with evidence indicating that all amounts owed were settled according to agreements. Notably, Roberts confirmed he was owed approximately $38,000 for Foxcrest and had been fully compensated for Antonia and Raymond. The transcript of Roberts' testimony from the earlier case was referenced but not admitted into evidence, although specific quotes are recognized as valid for the current case because they were acknowledged during the trial. The document includes various docket references for evidence and procedural details regarding the trial's conduct.